KPMG case questions legality of reserve funds

Allegations that international accounting giant KPMG assisted Columbia/HCA Healthcare Corp. in a scheme to defraud Medicare have raised serious questions about how the federal government now views several standard industry practices, including the keeping of reserve funds.

"We used to just settle these sorts of questions at year’s end," observes one health care attorney. "Now, all of the sudden, the government is alleging criminal activity."

At issue is a federal suit filed last year alleging that KPMG helped some Columbia-owned Florida hospitals set up secret monetary reserves. The government argues that KPMG executives failed to advise Columbia to correct a cost report the accounting firm knew was misleading. Instead, the government alleges, KPMG advised the hospital to establish a reserve fund as protection in case the hospital was audited. The government also claims that Columbia had a second set of books that were reviewed and in some cases compiled by KPMG.

"We think the lawsuit is without merit," says John Fidler of KPMG’s corporate office in Montvale, NJ. He adds that the work that KPMG performed was "quite limited" in helping Columbia prepare its cost reports. "It is important to point out that we did not audit those cost reports," he says. "We simply assisted Columbia in the preparation of those reports."

Nevertheless, KPMG’s involvement in the Columbia trial has unleashed a host of questions about the complex area of "reserve funds." According to Paul Duffy, a partner with PriceWaterhouseCoopers in Charlotte, NC, there is nothing new or unusual about the use of a reserve fund in the health care industry. "The practice of setting up of a reserve relating to a cost-reporting process has been around forever," Duffy explains. "Every industry reports reserves. It is a normal accounting practice whenever there is uncertainty and a firm wants to make sure their financial statements reflect that uncertainty."

But a reserve is not a second set of books, cautions Mac Henderson, a partner with PriceWaterhouseCoopers in Washington, DC. According to Henderson, one of the concerns that accounting firms harbor is that the government may try to portray reserves as evidence that somebody is hiding something. "I think one of the issues that this trial is going to address is conduct and knowledge," he says. "The government alleges Columbia included known non-reimbursable items on their cost report and maintained the reserve in case they were caught."

"What is on trial here is whether Columbia filed for something they knew, or should have known, should not have been reimbursed vs. the practice of calculating reserves," agrees Duffy. "Anytime you have two sets of anything, the government is going to ask questions," he says. "And if you have one with a high number and one with a low number, they are always going to want to know why they are getting the high one."

Duffy adds that when hospitals do ask Medicare program intermediaries for guidance on whether or not something is allowable, intermediaries sometimes seem afraid to give advice. "What you have is a lot of providers with information that is unclear, but they’re unable to get advice about what should be filed," he says.

Gabe Imperato, a health care attorney with Broad & Cassel in Fort Lauderdale, FL, says several important lessons can already be drawn from the Columbia/HCA case. "The first is that if providers know they have been overpaid by a government payer or even a private payer, they should take immediate steps to resolve that overpayment liability," he says. "By no means should they ever take steps to conceal it in an effort to retain that money."

According to Imperato, that principle is being applied in a number of other investigations that aren’t making headlines. He says the government has made it clear that it takes seriously the obligation of participants in the Medicare and Medicaid programs to disclose the receipt of unauthorized benefits they may have received mistakenly and make efforts to repay them. "The government’s position is that if you are in that situation and you don’t [repay], you may have committed a crime and possibly a civil false claim," he says.

The Columbia case also illustrates the fact that the feds are closely examining instances of fraud in the cost-report reimbursement process in this case as well as several other cases currently pending. "Cost report fraud is a path that is being blazed in the Columbia case but it is an area of scrutiny that is being applied across the board," Imperato says. Finally, the Columbia/HCA case shows that nobody is immune from liability. That includes the principal providers as well as consultants who may have conspired with or otherwise aided them in the activity.